The ICAI has issued the 8th edition of Guidance Notes which recommends changes in the way turnover is calculated to determine tax audit for options traders.
Tax Audit has been a contentious issue, especially for investors and traders. To put it very simply, under tax audit a practising Chartered Accountant examines and reviews books of accounts of a taxpayer and reports the required information in the Tax Audit Report. The auditor then submits the tax audit report to the Income Tax Department.
Conditions for Tax Audit for Traders
Let’s quickly check out the conditions under which Tax Audit will be applicable for traders u/s 44AB
Turnover above INR 10 crore
The limit of turnover as per Section 44AB is INR 10 Cr if at least 95% of the total payments and at least 95% of the total receipts are digital in nature.
If the trading turnover exceeds INR 10 Cr, Tax Audit is applicable as per Section 44AB(a) of the Income Tax Act.
Turnover between INR 2 Cr and INR 10 Cr
When turnover is between INR 2Cr and INR 10Cr, neither Section 44AB (or any of its subsections) nor Section 44AD (presumptive taxation scheme) is applicable. Therefore, Tax Audit is not applicable irrespective of profit or loss.
This is a grey area and we are still awaiting an explanation for the same from CBDT.
Turnover is below INR 2 crore
Tax Audit is applicable under Section 44AB(e) if all the below conditions are satisfied:
- Incurred loss or profit is less than 6% of turnover
- Total income is more than the basic exemption limit and,
- The taxpayer has opted out of the presumptive taxation scheme in any of the previous 5 financial years
What has changed after the new guidance note issued by ICAI?
The conditions for Tax Audit remain the same. However, what has changed is the calculation of turnover for Options Traders.
As per the 7th edition of Guidance Notes issued in 2014, premium received on the sale of options was to be included in the turnover. However, there was no further clarification given.
So generally while calculating the turnover for trading in options, along with the absolute profit, the premium received was also included.
However, the 8th edition of Guidance Notes issued in August 2022, makes the calculation of options turnover much more clear. It states that Premium received on the sale of options was to be included in the turnover.
However, if that premium has already been included while calculating the net profit, it doesn’t have to be included separately. So now, your absolute profit will be your turnover for Options.
To put it simply,
As per the 7th edition of Guidance note of ICAI
Options Turnover = Absolute profit + premium on sale of options
As per the 8th edition of Guidance note
Options Turnover = Absolute profit
How will it impact Tax Audit applicability?
The new guideline will reduce the turnover calculation for many options traders and consequently bring down the need for getting tax audit as well.
Let’s take an example.
Suppose you made the following trades:
- Bought 20 lots of 800 shares of X Bank August 1400 CE for INR 100 and sold it for INR 200
- Sold 5 lot of 500 shares of Y company 17900 PE of August at INR 150 which was bought at INR 200
- Sold 2 lots of 100 shares of A enterprise July 5000 CE for INR 200 and contract no squared off on expiry and delivery given
- So the total turnover of these trades would look something like this
So, as you can see, your turnover will be much less as per the new guidelines of ICAI. This will definitely ease tax audit requirements for options traders.
It is not difficult to see how one’s turnover could surpass INR 10 crore when adding sell value to absolute profit. Once your turnover exceeds INR 10 crore, tax audit will be applicable to you irrespective of profit and loss.
However, upon not including the sell value, there’s a good chance that the turnover of many traders would come under INR 10 crore, which previously would have exceeded INR 10 crore and the new turnover might not mandate tax audit.
This will definitely reduce the burden of compliance on options traders and it will encourage more and more traders to be transparent while declaring their turnover while filing ITR
Tax audit is applicable when your turnover is above the threshold or you have losses and your total income is above the basic exemption limit.
If your total income is below the basic exemption limit of INR 2.5 lakh and your turnover is below the threshold - Tax audit is not applicable. You can carry forward the losses by reporting them when filing your ITR.
You can use this tool to determine if tax audit is applicable to you.
Learn more about tax audit
Hope this helps
Thanks for the reply, few more doubts…
So I can carry forward as much loss as I want till the time turnover is less than threshold without going through audit?(salary income less than 2.5L )
Is there a way on the e filing website where I can just declare my losses in the above case without wanting to carry them forward?
I’m asking this because this is going to be my first time
You can carry forward the losses by filing ITR within due date without going through tax audit when your total income from all sources is below 2.5 lakhs and total turnover from trading activities does not cross the threshold limit of 5 crore.
No other way except filing ITR. If you do not want to carry forward the losses while filing ITR, you can make the losses to be carried forward as 0 in “Schedule CFL”, but there is no way to report losses to ITD except filing ITR.
Hope this helps!
In case of Income Tax on Trading, since all the trading transactions are digital, the prescribed rate under Sec 44AD would be 6% of the turnover to determine the applicability of tax audit.
You can use this tool to determine if tax audit is applicable to you or not
For FY 2020-2021
I have made a loss of 2,36,532 with Turnover of 4,56,545 in option Trading
I have a salary income of 1,30,000
Should i pay tax
which ITR should i file
whether Audit is required.
Continue the conversation on TaxQ&A
253 more replies